There Will Never Be Loans As There Used To Be

Available in: Montenegrin

Author: Marija Mirjačić
Published in Vijesti, “Kredita nikad više kao nekad”, Vol. 12, No. 3908 (February 12, 2009), pp. 1, 15.

Montenegrin commercial banks have requested the central bank to reduce mandatory reserves by one-half so that the banks would have this money available for their operations. What is your comment to this proposal?

There is no doubt that the overall environment for commercial banks, both in Montenegro and elsewhere, is considerably more difficult in 2009 than has been the case during previous years. External capital inflows, which have been fueling economic growth rates during the boom years, will not materialize at comparable levels, leading to a fall in consumption and investment and, with it, income for Montenegrin firms and households. Hence, from a purely macroeconomic point of view, policy measures aimed at increasing liquidity within the banking system are welcome. But there is, of course, another dimension—apart from standard requirements such as those by the Basel Committee on Banking Supervision—that will have to be looked at very carefully and would have to flow into the central bank’s decision over the commercial banks’ request. While reserves requirements represent economic costs to commercial banks (in that they bind liquidity beyond the level needed for day-to-day operations), they perform an important “insurance” function for depositors. Thus, any substantiated view on whether or not there might be any space to reduce minimum reserve requirements presupposes a clear understanding of how changes to the current economic environment will affect the individual banks’ financial position over the foreseeable future.

In which way can the banks regain the trust of their depositors in this situation (having in mind that a lot of money has been withdrawn from the banks, unofficially around €300 million) and that loans are not being approved?

Confidence has not been lost, not this time. It is indeed the case that, since autumn 2008, we have seen deposits being withdrawn at roughly the level you have referred to in your question, but these have been gradual, at an average of about 5 percent per month—indicating that households and firms withdrew money from the banking sector essentially for “dissaving” reasons (given established consumption and expenditure habits that collided with an unexpectedly abrupt end to the economic boom) and not because they have lost confidence into the banking sector. As spending is gradually being adjusted to revised expectations of sustainable income levels, which would be consistent with today’s economic conditions, we should be seeing a gradual deceleration in the rate of deposit withdrawals in the months to come. Montenegro is going through an economic adjustment phase (which is also reflected in the financial market) towards the new—and, admittedly, more difficult—reality of today’s global economy. In this context, it is important to note that the Montenegrin authorities have been very pro-active this time, acting in a closely coordinated manner. Apart from continued efforts by the central bank to ensure full transparency in the banking sector, both the Finance Ministry and the CBCG, from the very outset of the global financial crisis, had stepped in to strengthen existing guarantees, including by the full insurance of all deposits. Clearly, the stock of deposits in the banking sector influences the ability by banks to extend credits to the private sector, and a trend reversal towards a net depositing into the banking system would increase the banks’ space of maneuver to approve loans. But it should be clear that the private-sector credit growth rates seen in 2006 and 2007 will always remain an extraordinary episode in Montenegro’s economic history.

What would be your proposal, in the short term, to overcome the current crisis, until the power utility has been recapitalized and sold?

There is no panacea, just the opportunity that every crisis presents, especially the focus on what is truly critical and crucial. The backbone of any successful economy is the sector of small and medium-sized enterprises—and an overall business climate that is conducive to private-sector activities. This means that rules need to be clear and simple and their application uniform across all enterprises, whether small or large, domestic or foreign. The crisis, if to be addressed adequately, will have to cement the supremacy of strategic objectives over tactical gains, including in the design of economic policies. This will ensure sustainability and avoid that growth will follow a stop-and-go pattern detrimental to Montenegro’s overarching transition and integration objectives. The fact that the government—rightly so—anchors its anti-crisis policies on the provision of an overall economic environment that is conducive to foreign direct investment is encouraging. But it ultimately implies that political priorities that do not have corresponding socio-economic benefits will have to be re-assessed constantly and consistently.